• Maintain BUY and MYR4.80 TP, 11% upside. Berjaya Food’s FY22 (Jun) results beat expectations on the back of the successful execution of effective business strategies across its brands and restored consumer confidence post pandemic, which all led to robust SSSG. With the stock trading at 16x FY23F P/E, which is near its 5-year historical mean, we believe the valuation is attractive, considering its improving fundamentals and solid earnings delivery.

• Exceeded expectations, yet again. BFD reported FY22 core profit of MYR126m (+134% YoY), coming in well above our and consensus’ full-year forecasts. QoQ, 4QFY22 revenue grew by 18.4% due to better sales performance, on the back of heightened foot traffic during the Aidil Fitri festivities – leading to a 20% growth in earnings to MYR40.8m. YoY, FY22 revenue jumped 39.1%, owing to healthy SSSG across its brands due to better consumer confidence post pandemic, and contributions from the 29 newly opened Starbucks outlets during the year – leading to an earnings growth of 134%. Net margin also expanded (FY22: 12.6% from FY21: 7.5%) due to the strong surge in sales, which led to better operating leverage. A fourth interim dividend of 2 sen was declared.

• Business rationalisation efforts yielding results. While 4QFY22’s robust performance can be partly attributed to the pent-up demand for seasonal factors, we believe that efforts taken by management in the past two years to solidify its business fundamentals have also contributed greatly to BFD’s commendable growth in recent quarters, demonstrated by the fact that 4QFY22 earnings of MYR40.8m were significantly higher than the MYR4m reported in 4QFY19 (Apr). Management’s strategy of increasing ASPs – through the promotion of seasonal beverages and upsizing of offerings – has also been effective in sustaining margins. Kenny Rogers Roasters (KRR) remained profitable in 4QFY22, while its menu revamp and strategic store closures are indicative of profitability being sustained.

• Expansion plans underway. Standing at 424 stores (Starbucks: 356, KRR: 68) as at FY22, BFD targets to open an additional 35-40 Starbucks outlets and 4-6 KRR stores in FY23. 40-45% of the Starbucks outlets will be in the drive-through format, which should bode well for the group as we gather that sales performance for this store format has been strong (at c.30% of total Starbucks revenue). The brand’s already entrenched network also points to the likelihood that expansions will be into less-urban areas, which could contribute to sustainable improvement in sales moving forward.

• We leave our earnings forecasts unchanged, expecting a normalisation in earnings for FY23F as we believe earnings have peaked. Our TP is unchanged at MYR4.80, which implies an 18x FY23F P/E (+1SD from its mean). We ascribe a 2% ESG premium to our TP, considering BFD’s ESG score of 3.1, which is above the country’s median.

Source: RHB Research - 17 Aug 2022